On an Assisted Buyback Scheme of North Korean Debt: A Strategic Analysis

The objective of this paper is to consider an assisted buyback scheme of North Korean debt and to generate the conditions that may lead to a mutually beneï¬ cial policy prescription. This paper argues that a mutually beneï¬ cial assisted buyback may arise if (1) the uniï¬ cation cost is substantial (2) the relative beneï¬ t from the reforms to status quo is greater than or equal to one and (3) the intrinsic probability of collapse of the current North Korean debt is reasonably high. Given that the conditions (1) and (2) are satisï¬ ed, the instability of the current North Korean regime invites the assisted buyback. With the assisted buyback, the hesitant North can start reforms. Hence, a crisis in the North facilitates the introduction of reforms via the assisted buyback by the South. Notice that the current secondary debt market price does not play any signiï¬ cant role in determining the assisted buyback decision by the South. Even if the current debt market price were high, the assisted buyback scheme could be a welfare-improving policy for the South as long as the above conditions are satisï¬ ed.